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Microsoft is clearly working on integrating IPTV into the Xbox.
There was an interesting interview with Bill Gates by Engadget where they asked a couple questions that really hit home.

Engadget: There’s been some speculation about the Xbox 360 as a platform for IPTV. I know IPTV is something I asked you about back in April, primarily as a platform for set-top boxes and things like that, what do you see as the 360’s potential as a means for delivering video to the home?

Gates: Well, the Xbox 360 obviously has the ability to do high definition and that’s what makes it such a fantastic extender for the Media Center. That’s another thing I set up, and just the speed of it, the fidelity of it is really better than the previous generation of extenders that we had.

It’s rich enough that, yeah, it can do set-top box like things. If you just want a set-top box, [the Xbox 360] is somewhat overkill, the graphics power that we’ve got there is for the world’s best games. Now that the cost of the chips in Xbox will be coming down over the next three, four, five years, it could get fairly cheap, but I still think you’ll see dedicated set-top boxes. You can always think of something like the Xbox 360 as a super set-top box that can do everything the set-top box does, but then have the graphics to do the games as well.

With the Xbox 360 we have the first device with a big hard drive, big processor, Ethernet connection, and HDTV output. At $300 it doesn’t cost much more than the ‘dumb’ Scientific Atlanta or Motorola boxes deployed by cable/telco carriers today. And whether you believe it or not, MSFT is shaping up to be the leading vendor of IPTV middleware. It isn’t a big leap to say an Xbox-Lite (no videogames, MOCA connectivity) would make the perfect set top box.

I think Gates is playing country bumpkin here, sounding like “Gee, the Xbox is kinda overkill but yeah I think it could work”. Realpolitik requires Gates to keep his mouth shut long enough to continue to lull his set-top box hardware partners (Motorola and Scientific Atlanta) into partner bliss. Then you’ll see Gates show up at Comcast headquarters with a $100 Xbox 360. Instead of HELLO MOTO it will be BYE-BYE MOTO.

As each day goes by, the Scientific Atlanta (SFA) shareholders who complain $6.9BB wasn’t enough for their commodity box company should shut up and cash their checks. What would you rather provide to subscribers as a cable operator- an Xbox 360 or a glorified radio tuner for video?

Just to drive things home, here is an excerpt of a speech made by Robbie Bach, Sr. VP and “Chief Xbox Officer“. He could just as easily be describing Xbox hardware, not IPTV software. (full transcript here)

I want to talk about a second one, which is Microsoft TV, and Microsoft TV again is a place where the company has been investing for quite a while. It’s a place where we see a real opportunity in the future and we’re really going to the next cutting edge. Many of you know we have a product called Foundation Edition, which is primarily designed to work with the cable industry and their existing hardware and new hardware they’re coming out with. Our current version of this is called Foundation Edition 1.7. Comcast is our biggest customer in North America; we have a 5 million subscriber deal with them. We also have a lot of business actually in Latin America, where we’re the leading digital set-top box software provider. This is a product that we’ll continue to invest in and continue to work with the cable industry as they make the migration over to the digital world.

But in some ways where the new cutting-edge work is happening, is in what’s called IPTV, Internet Protocol Television. And IPTV Edition is our product that’s entering in that space, and I want to talk a little bit about what that means and then we’ll take a moment to show it to you. Basically what IPTV Edition enables you to do, regardless of whether you’re a cable provider or a telco or any net operator, you can take live media, on-demand media, across an IP network and put it into the home on a high-definition television, and you can do multiple streams of that content without having to have multiple tuners in the set-top box. You really can produce an amazing TV experience. You get better TV just in basics, and then you get a better-connected TV and a better platform.

And I want to point out from a Microsoft perspective what’s very cool about this is not only is this a new product and a new business for us to sell, but it also is fundamentally based on our other technologies. This product sells SQL Server, it sells Commerce Server, it sells the rest of our backbone into these operators, and really helps broaden our business.

Hey Robbie! You forgot to mention Xbox!

Discussion

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Sorry, but your belief that the cost of the Xbox 360 will drop to the same level as a basic STB is silly. You seem to have forgotten that just as the cost of the chips used in the Xbox 360 will drop, so too will the cost of the chips in a standard STB.

Games are one of the most processing-intensive applications around. A standard STB has no need for all that. No matter how cheap a Xbox 360 becomes, a standard STB will always be magnitudes cheaper.

But all this misses the point. The fact is people are prepared to pay for Xboxes, Playstations, et al and they will be in millions of living rooms. Once they are there and now that we have more and more streamable content available over the public Internet, what do we need the cable TV companies for? What is the point of all this IPTV stuff?

All the consumer needs is a device capable of decompressing an MPEG stream, a connection to the Internet and access to a site like Google. All that will eventually be part of a standard TV.

You are right. They cannot compete on price as is. But set-top boxes are increasing in complexity (hard drive, DVR functions) and nothing prevents MSFT from creating a lobotomized Xbox with just enough functionality for DVR and stored IPTV. Plus, what really needs to be examined is the marginal cost between a set top box and an Xbox, and the Xbox pricing will drop much faster than that of a commodity set top box.

Agree 100% that you will not need cable TV in the traditional sense 10 years out. The portal you speak of is a very important part of making that transition. It will need to be very easy to use in order to gain acceptance, and I think the hardware/software/network integration of Xbox/Xbox Live is in the leading position, along with Tivo.

-> “Sorry, but your belief that the cost of the Xbox 360 will drop to the same level as a basic STB is silly. You seem to have forgotten that just as the cost of the chips used in the Xbox 360 will drop, so too will the cost of the chips in a standard STB….”

Please note: an STB used by MSOs (also by Verizon in FiOS as they use RF, not IPTV, for the moment – but will migrate when MSFT IPTV Edition is ready) does not only contain silicon + HD drive (which effectively is similar to Xbox360 and will come down in price similarly), it also containes one tuner for each channel (that’s the nature of RF). IPTV eliminates the tuner business, which is where its key economics reside: you get IPTV-on-a-chip ultimately. Not to mention the non-finite number of channels for IPTV (versus strong limitation in the number of channels, and only a handful of HD ones, with RF in DOCSIS2.0).

While it is fair to say that DOCSIS3.0 will somewhat ease this pressure on MSOs and improve their value proposition (particularly in BB access and in HDTV broadcasting ability) greatly, I would strongly warn you against neglecting:

2) the ability of MSFT to heavily subsidise its box (as this is routine in the consoles market) and get the payback elsewhere (in games, in software… you name it), something that MOT, SFA (now CSCO) and the like will never, ever, be able to match.

Quick point. There is a big limitation to the Video functionallities: the bandwith. HD VoD (unicast or multicast) type of functionallities are really far from achievement on the public internet, even with Mpeg4 AVC.Here IPTV and Cable can still have their space. Keep this in mind.

Fist off, comparing a STB to ANY device with an operatiing system is not apples and apples. Try looking at a Set Top PC versus a STB. Light years apart in what you can and can’t do. I’ve always said that an STB is the Internet through a plate glass window. Look, but don’t touch.

IF the XBox360 and all its capabilities cannot deliver an interactive Internet along with it’s new IPTV features and on-line gaming, it’s still nothing more than the Internet through a plate glass window. Just with some added intertainment.

But WHO has an Xbox360 that doesn’t already have a TV and some form of broadcasting? What “niche” solution is this unit fulfilling? Is there something on MS TV that isn’t anywhere else?

Personally, give me a Set Top PC that allows me a fully interactive PC Gaming, Internet interaction, personal/business applications as well as Television in ONE unit.. and THEN you have a Revolution.

From what Ive read about this system its not all peaches and cream. To properly use the IPTV a seperate box will be needed along with you having to subscribe to AT&T since they are one of the only fiber optic networks in the US. If thisnis the case I for one will not be getting this.

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